Venture Capitalist vs Angel Investor
Business GuidesJanuary 18, 2023

Venture Capitalist or Angel Investor: Which one to choose?

Venture Capitalist vs Angel Investor: Understand the Difference and How to Choose Between Both

For all startup co-founders and entrepreneurs, it’s vital to understand the key differences between a venture capitalist vs angel investor for wise funding decisions. Here’s an in-depth guide to the two most common funding options. 

Startup cofounders and emerging companies are always looking to seize funding opportunities to get their business idea up and running. Many businesses ignore key differences between two of the most popular sources of seed and start-up funding— angel investment and venture capital financing. But every business venture heavily relies on informed financial decisions for both short and long-term growth. Learn more about how angel investors differ from venture capitalists and make the right choice to secure your next investment.

What is an angel investor?

Angel investors are high-net-worth individuals that fund early-stage businesses in exchange for equity stakes, convertible bonds, or royalties. Most angel investors back new ventures at the earliest stages, putting them a risk of losing all their money. However, the angel investment market has witnessed significant growth in recent years. According to the latest angel market analysis from the Center for Venture Research at the University of New Hampshire, 64,480 startups collected over $25 billion in angel investments in 2020, which is a 6% increase over 2019. 

There are accredited and non-accredited angel investors. According to the Securities Exchange Commission(SEC), angel investors must meet one of the following criteria to be defined as accredited investors. 

  • The individual must have over $200,000 in annual earnings for the last two years. The amount increases to $300,000 if the investor files joint taxes with their spouse. They should also have a strong likelihood of yielding similar or more revenue in the upcoming years. 
  • The individual should have a net worth of at least $1,000,000. 

Why or why not choose angel investors?

Asking for cash infusions from established wealthy individuals has its pros and cons. Most angel investors are former entrepreneurs looking to invest in new businesses with potential. Some angels are also doctors, lawyers, and other professionals who invest their own money to keep new businesses afloat during the early stages. According to Forbes, a business may be just an idea or a prototype when they seek initial investments in the seed round from angel investors. 

But what’s at stake? A business angel will mostly ask for a percentage of equity in exchange for funds for a venture. Let’s weigh some pros and cons of seeking funds from business angels. 

  • Traditional funders such as banking and non-banking financial institutions or venture capitalists follow regulations to avoid investment risks. However, angel investors are usually ready to bear the greater risk as compared to others since it’s their own money. Unlike small business loans, your credit history won’t be an issue if a business angel finds potential in your idea.
  • Getting funding from angel investors is a less risky option for entrepreneurs since they don’t have to return the money in most cases, even if the startup fails. 
  • As stated before, angel investors are former startup founders with ample business knowledge on how to grow your business during entrepreneurship. They can provide multiple cash infusions during the initial stages to fill any cash flow gaps while also assisting you in business growth.
  • Since it’s a high-risk investment for angel investors, they generally seek large stakes in your startup for high rewards. It may eventually lead to less control over managing your business, so it’s important to consider several factors such as future funding options before laying off equity stakes to business angels. 

What are venture capitalists?

A venture capitalist can be an individual or a group of primary members of firms looking to invest in businesses with long-term growth potential. VC firms generally involve in business investments after seed rounds (held by angel investors). In 2021, startups and emerging businesses in their late stage acquired 237.8 billion US dollars of VC investments as compared to companies in their early stage that acquired 76.6 billion US dollars of VC investments in the United States. 

Venture capital investors can provide large sums of investments to rapidly growing startups but they staff analysts, partners, and several other professionals to ensure all the deals are soundly reviewed. VCs don’t fund businesses from their pocket but they seek money from wealthy individuals, corporations, and several other entities. This implies that VC firms often use the capital of others to make large investments in businesses with proven growth potential. Venture capitalists can eventually end up buying these companies or acquire large stakes in case of an initial public offering (IPO).  

Why or why not choose venture capitalists?

Venture capitalists invest time in researching all possible investments since they have the responsibility to the firms they want to invest in. Moreover, they act as limited partners and assess all risk factors before investing in a startup. Entrepreneurs should have some proven success in their business before seeking funds from VC firms. 

Venture capitalists use their connections and network to help startups tackle any obstacles such as expanding their customer base, developing in a new market, and more to create successful businesses. Let’s roll through a few pros and cons of getting funding from VCs. 

  • Startups usually need large investments during late stages and venture capitalists can provide substantial funds as compared to any other funding option. 
  • Venture capitalists also provide entrepreneurs with low risk and often don’t ask for repayment in case of startup failures. 
  • Venture capital investors are usually market gurus with ample industry experience. They utilize their connections with industry leaders, beneficial third parties, and other investors to build successful companies. 
  • Venture capitalists often ask for a controlling interest in your business. Entrepreneurs are effectively removed from full leadership once they get VCs involved. 

Venture Capitalist vs Angel Investor: What is the difference between venture capitalists and angel investors?

As two of the most common funding sources, the question of venture capitalist vs angel investor often arises. We can point out a lot of similarities in both such as they both cater to startups with potential, both bring low-risk to entrepreneurs as compared to other funding options, and both bring ample business experience on board. That being said, there are some key differences between angel investors and venture capitalists.

1. Venture capitalists are often part of a company, whereas angel investors are individuals.

Business angels are often influential individuals and it’s common for them to provide financial support to new entrepreneurs with potential. They are wealthy individuals who see profit in exchanging equity stakes with financial support to high-potential startups. Given that they invest from their pockets, and that too in very early stages, you should be willing to give away a good share of your company or you won’t find any angel investors take such high risk for low reward. 

On the other hand, venture capitalists use capital from different individuals, corporations, foundations, pension funds, and other entities. They involve in businesses as limited partners, instead of a general partner who works closely with entrepreneurs. Their primary objective remains fund management for the companies and ensuring the companies have a healthy growth rate. 

2. Angel investors invest in early-stage companies while VCs prefer startups in late-stage

Startup founders own full company stakes during the initial stages and you can only acquire angel funding in the early stages by giving away substantial equity shares. Early-stage companies with a thorough business plan and market research often reach out to angels to get business off the ground.

On the contrary, venture capitalists usually only provide financial support to rapidly growing startups. VCs hold investment rounds for companies called Series A and only startups with an established market and some sales to show are targeted. If a startup shows incredible growth potential and a promising future, only then a venture capitalist will invest in companies at an early stage. Businesses can raise large investment sums in Series A if they can show consistent growth in sales and a proven record of rapid growth. 

3. Investment amounts are different

Before you approach anyone for investment, you should have an estimate of how much financial support an angel investor will be able to provide. Typical investments made by business angels range from $25,000 to $100,000. You might raise more if you can get angels in a group but they are generally a quick solution to get a business up and running. 

Venture capitalists, on the other hand, can fund the full capital requirements of a startup. VCs on average invest $7 million in a company as compared to angel investors’ limited financial capacity. 

4. Their level of contribution and involvement varies

It’s important to consider what an investor contributes to a business and what they intend to contribute in the future. It’s common to see angel investors not involved much in the decision-making of the companies they fund. They can provide you with business guidance, any sort of industry experience they might have, or even contacts if they can, but very rarely they will be involved in directly running the business. 

A venture capital firm is totally different as VCs always demand direct involvement in business decisions. They show a high level of involvement and even ask for a position on the board of directors of a company. That is why many venture capitalists eventually end up owning the entire company since they invest years in it, which is also our next point.  

5. Angel investors are typically invested for 2 to 5 years, while venture capitalists stay a lot longer 

 A venture capital firm will stay invested for at least 10 years before exiting and that is why they provide high value during the late stages of a business. On contrary, angel investors commonly stay involved in investment during the initial years of a startup and tend to leave later. The length of investment of venture capitalists relies on business growth. Businesses with high potential can seek years of funding from VCs and even sell them the entire business once it is well-established.

Why are angel investors better than venture capitalists?

Whether angel investors are right for your business or venture capitalists will generally depend on several factors stated above. Angel investors are better than venture capitalists if you are in the very early stage of your startup but VCs can get you large investments if you are already a growth-oriented company. 

Due diligence is another big factor that a lot of early-stage founders consider since most business angels do no due diligence while entrepreneurs expect them to spend some time on the business. At the same time, venture capitalists are bound to do more due diligence as they are limited partners of your business, and it eventually gives them good ROI on the money they’ve pooled from others. 

Final Word 

It’s important to understand the difference between venture capital vs angel investing before exchanging your equity stakes with anyone. 2 out of 10 startups fail in the first year whereas only 1% become unicorns like Uber. From the first year as a startup to becoming a unicorn business, both types of investors can be helpful at different stages of a business. Consider the above factors and make the right decision as your financial requirements.

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